Farmer Jones must determine whether to plant com or wheat. If he plants com and

Question

Farmer Jones must determine whether to plant com or wheat. If he plants com and the weather is warm, he earns $8,000; if he plants com and the weather is cold, he earns $5,000. If he plants wheat and the weather is warm, he earns $7,000; if he plants wheat and the weather is cold, he earns $6, 500. In the past, 40% of all years have been cold and 60% have been warm. Before planting, Jones can pay $600 for an expert weather forecast. If the year is actually cold, there is a 90% chance that the forecaster will predict a cold year. If the year is actually warm, there is an 80% chance that the forecaster will predict a warm year. How can Jones maximize his expected profits? Also find EVSI and EVPI.

Explanation / Answer

Expected Profit on Corn

(8000*.40*.80) + (5000*.60*.90) – 600 = 4660

Expected Profit on Corn

(7000*.40*.80) + (6500*.60*.90) – 600 = 5150

Hence, in order to maximize the profit, Farmer Jones must plant Corn.

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